While most eyes will be on the Bank of England and European Central Bank decisions today it is very unlikely that we see any actual change in policy from either body. The most we can hope for is a press conference from ECB President Mario Draghi that shows that an Executive Council that sees necessary and desires further loosening of monetary policy. Even this may be a bit of a stretch.
Picking apart pieces of Draghi’s post-decision speech will likely see a European Central Bank that sees inflation expectations “well-anchored”, despite the recent disappointment of preliminary CPI to a fresh cyclical low of 0.4%. Despite the softening of the euro since June’s ECB meeting, inflation expectations have not picked up and we believe further falls, including below 1.30 in EURUSD, is needed for a meaningful uplift in expectations.
In the meantime, the song will remain the same. The ECB will remain happy, and “stand willing” to use looser monetary policy to aid the Eurozone economy if they deem it to be necessary. If we were to take bets on the first 3 questions that Draghi will be asked by the assembled press corps at the conclusion of his statement, we would say one will be about Russia, another about Italy falling back into recession and the final one about the bankruptcy of the Portuguese bank Banco Espirito Santo.
Last night, Vladimir Putin’s government threatened to ban all agricultural imports from the United States, and all fruit and vegetables from the European Union in its first trade-side retaliatory blow. The veritable shopping list of banned items will be announced on Friday but Draghi will be put under pressure to acknowledge that the European Central Bank will closely monitor the effect of a closure to what is a EUR2trn market.
The last 24hrs has not been a strong one for European data, and will lead to some strong questioning of the ECB President. German factory orders is a volatile index but the 3.2% fall in a month is the worst in 2.5 years and industrial production figures released this morning have also showed distinct levels of softness. Once again these call into question how strong the German export machine is with the current pressure within Europe, and on Russian trade flows. Yesterday morning’s release of Q2 GDP from Italy showed a country that is back in recession and, ironically, has not grown since Berlusconi left office. Matteo Renzi has more of a job on his hands than Francois Hollande it seems, for all the negative press the latter gets.
Finally, we expect questions on the European banking system following the Portuguese central bank’s decision to bailout Banco Espirito Santo (LISBON:BES) towards the end of last week. With stress tests upcoming for all European banks, pointed questions as to the likelihood of other skeletons being found in German, French, Spanish or Italian closets. The Portuguese Finance Minister will be taking a press conference on BES today at 4pm BST.
With all that to chew over,from a European point of view the Bank of England meeting has been made to look boring, it will be. This week’s Bank of England meeting is arguably less important than the minutes of said meeting due in a fortnight. We know that this month’s meeting will see a continuation of current policy – data in the past month has done little to pull in rate hike expectations – but whether this will be the first month that prompts a member of the Monetary Policy Committee to dissent is very much up for discussion. A hold in policy on Thursday will have little impact on the pound in the short-term.
The main mover overnight has been the Australian dollar after a pretty abysmal jobs report that pushed the unemployment level to the highest level in 12 years. Markets had been looking for an increase in employment of around 13,000 people and got a decline of around 300. We saw the Reserve Bank of Australia hold rates this week for the 12th month in a row and this unemployment number has seen expectations of 3bps of hikes over the course of the next 12 months whittled down to 6bps of cuts in the same time period. AUDUSD has slipped to its lowest level since May 21st as a result.
US data comes in the form of the typical weekly jobless claims number at 13.30. The USD was able to extend its gradual grind higher courtesy of a very strong US trade number. The US’s trade deficit – the difference in the values of its imports and exports – saw its deficit fall by 7% in June. This should see another positive revision to GDP later in the month.
